Chapter 11 Bankruptcy Chapter 7 Bankruptcy Chapter 13 Bankruptcy
What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy refers to the chapter in the United States Bankruptcy Code
that permits a business to reorganize in order to pay its creditors. This
chapter can be used also be used by individuals but it is most often invoked by
corporate entities and sole proprietorship businesses. Chapter 11 reorganization
is a legal procedure that permits a business in debt to remain in business while
a reorganization plan is put into action so that the business can pay its
creditors and continue its operations. It also protects the debtor from
harassment from the lenders and creditors and helps to rehabilitate the
business.
Ideally, you will avoid bankruptcy at all costs because it has a negative effect
on your suppliers and customers. If potential customers hear about any financial
problems, they will take their business elsewhere.
When you file for Chapter 11 bankruptcy, all of your debts are turned over to
bankruptcy court. Therefore, you creditors no longer receive payment from you;
you make your scheduled payments to the trustee who in turn pays the creditors.
The court oversees and approves the individual plans to repay each lender. Since
the lenders are no longer dealing directly with you or your business, the court
issues an order that your creditors can no longer collect any money from you.
The court proceedings to file for Chapter 11 bankruptcy take anywhere from nine
to twelve months just to determine a plan of which the court approves to paying
off the debt. This reorganization of payments often means that the individual's
monthly payments are reduced and paid over a longer period of time. Once you
have filed for Chapter 11 reorganization, your business can be in this state for
several years. In fact, approximately 45% of Chapter 11 cases filed since 1979
is still unresolved.
If everything goes according to plan, you will remain in business but under very
strict legal constraints. The court may also appoint a trustee to revamp your
finances and oversee every operation of your business. Therefore, you lose some
control of the daily processes. However, if you have the income to sustain your
business, a Chapter 11 reorganization can help you. It simply gives you more
time to pay off your debt and legally stops creditors from harassing you and
filing lawsuits.
Unfortunately, Chapter 11 proceedings are extremely expensive and complex. This
structure works well for large corporations but smaller businesses often run out
of money before the case is finished. Even though this chapter is in place to
help businesses recover, the fact is that nearly 90% of the companies that file
for a Chapter 11 reorganization go out of business due to the high price of
legal fees.